RBA Review: No surprise

The RBA kept the cash rate on hold at 4.35% as the current inflation picture does not support any change of monetary policy. The forward guidance statement has changed to "Data have reinforced the need to remain vigilant to upside risks to inflation and the Board is not ruling anything in or out. Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range." from "The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out.".  However, we do not see the change in wordings equal to opening the doors to more tightening with them highlighting both "Inflation in underlying terms remains too high" and "Momentum in economic activity has been weak.... Wage growth seems to have peaked". Yet, the RBA acknowledged there is upside risk to their current inflation forecast.

The decision aligns with RBA's rhetoric of being data dependent and patient in assessing the cumulative effect of tightening while keeping a close eye on inflation dynamics. RBA will prefer not to further tighten after a dismay Q1 GDP with sluggish consumption growth but the latest revival of inflationary pressure has forced RBA to announce their push back in early easing. While the room for RBA to tighten without significantly hindering economic growth remains minimal, RBA is unlikely to further tighten given transitory factors, especially energy prices, are highlighted to be the major factor in pushing CPI higher. The household balance sheet are restricted by mortgage cost and inflationary living pressure, while business are facing the tightest financial conditions in months, alongside peaking labor market even as the Australian economic growth being stronger than market consensus. However, the higher than expected inflation also does not allow the RBA to perform any easing in coming months. RBA acknowledged the pace of moderation is much slower, citing excess demand, elevated cost and peaked but still high wage growth to be key factors. 

Despite the latest Q2 CPI has shown a rebound to 3.8% y/y and has eliminated the possibility of any early easing from the RBA, the RBA trimmed mean CPI is lower than forecast and monthly CPI in June has rotated lower to 3.8% from 4% in May. To the contrary, PPI is steadily edging higher to 4.8% y/y in June which may translates into a certain level of inflationary pressure but is likely balanced by the softer domestic consumption and slower wage growth. The RBA did not change their inflation forecast and seems to be content with the trajectory of inflation by seeing 2-3 percent in 2025. We maintained our forecast of terminal rate to be 4.35% and now only see one 25bps easing by year end 2024.